Leisure real estate market makes waves

Big investors are like oil tankers;
slow to start and even harder to steer. But once they get going, boy do they
make waves. It took a decade for retail warehousing to feel the full force of
this buffeting. Leisure property is feeling the wash after only a couple of
years.

'But how do they steer the right course?'
asked the bemused research director of one property consultancy. 'Where are
the borders between prime and secondary? What are the correct yields. There
is no performance measure because the Investment Property Databank has no leisure
category.'

He has a point. The market is so new that
prices can appear guesswork to outsiders. When multiplexes fetch sub-7% yields,
as in a recent Chesterfield deal by Canada Life, there is every right to be
looking around for icebergs in the fog.

There is a method in this madness, however.
'You can extrapolate from retail warehousing,' says Will Scoular of Richard
Ellis. He looks at internal rates of return over five to ten years, setting
targets of 12-14% for non-geared schemes and 20% when geared. Complications
arise, however, over schemes like cineplexes, where stepped increases of 3%
a year were built in because this is such a new market. Premiums are also hidden
in some deals.

This is where fireworks will fly when reviews
come around. 'You can't compare with a property down the road because two cinemas
will be under different terms and fitted out differently,' says Helen Turner
of Knight Frank.

Opinion is already divided on whether current
initial yields give an accurate picture of the market. James Welch at Jones
Lang Wootton points out that such schemes are immediately reversionary, as rent
levels will have risen by the time they open. Equivalent yields - generally
7% or more - are more accurate, he says.

Cue for an explosion from Turner, who warns
that much can happen in that time. 'What if the Chesterfield scheme is hit by
the new Sheffield development? Who can say how much rents will change?'

Leisure is rife with this kind of problem.
There is no universal product which accepts simple rules. Golf and hotels, for
instance, are totally different to multiplexes. 'Golf courses
are businesses. We value against profit and set benchmarks by comparing the
accounts against comparable facilities,' says Jeremy Rollason of FPD Savills.

Broadening that skill to plan from general
trends is fraught with danger. More than 500 courses were built after predictions
of a surge in golfing in the Nineties. The best have flourished, with yields
hardening from 15-20% to 10-20%, but others are now being sold on cheaply because
demand has not matched expectations - or they are simply bad locations.

Cinemas are easier to analyse in conventional
property terms because they are let on standard leases to generally strong covenants.
But they are also in danger of succumbing to trend planning. The current rush
for sites is a response to the idea that the UK is underprovided compared
with a country like the US. But latest figures show growth over there has peaked.

We probably have some way to go, but margins
may not be as promising as the surge of planned development implies. Screens
increased by almost 70% from 1980-96 in the US while attendance rose by only
30%.

Yields are no problem to John Henley, managing
director of leisure developer THI, who insists that 'boxes' on leisure and retail
warehousing parks are similar enough for standards to overlap. There have
also been enough open market deals to set standards, he adds, And those frightened
enough to need an industry benchmark will probably have to wait only another
12 months before the IPD separates out the sector.

He is more concerned with false comparisons
between stand-alone cinemas and the kind of parks THI is building. The prime
location, public transport links and broad base of a scheme like his developments
at Cheshire Oaks and Sheffield makes this a different animal.'These
will blow away stand-alones and poor quality locations - which is why they deserve
prime yields,' he says.

Two wispy clouds remain stubbornly fixed
overhead, however. What will happen to values if the tide of potential development
rises and how will these big schemes survive if forced back into town centres
by a government newly converted to protecting the green belts?

Welch says 15 leisure park deals worth
350m were done last year alone, and JLW Finance estimates another 70m of institutional
money is waiting to be spent on leisure. Turner fears that sentiment is rising
on expectations of more business along the lines of the 16.75 pounds/sq ft
paid by UCI for a scheme on Trafford Park. 'But these prices will never be met
outside certain city centres,' she says.

Like the tide of business parks promised
earlier this decade, most leisure schemes will not see the light of day. 'The
first past the post in each area will see off any chance of later ones,' says
John Harrison, who runs the Marylebone Warwick Balfour leisure funds. That
is why he is betting that yields still have some way to go before the market
tops.

In-town development also holds few fears.
'These sites would have better yields because they offer a wider range of alternative
uses if leisure does not work,' says Welch. In fact, the crucial importance
of public transport to future developments gives in-town development a premium,
adds Henley, who is already working on schemes in Luton and Bexleyheath.

Big-name investors appear to think there
are profits to be made. Norwich Union bought the Festival Leisure Park in Basildon
earlier this year on a seemingly soft 7.5% yield, although this was set last
year. MEPC is among property companies playing the field. It's latest acquisition
involved THI's Luton centre, bought for 17m pounds on an 8% yield.

Few are confident enough to dive in head
first, however. 'There is very little good stuff around so the funds need hand-holding,'
says Turner.

Chris Taylor, investment director at Prudential,
is a recent convert to leisure but is not ready top start throwing money into
ready-made investments. The Pru is driven by research, and the market is still
too young to provide performance data. 'It also looks a bit expensive,' he says.

Not, however, when you are building in your
own back yard. The fund happens to have a major stake in Bluewater Park, Dartford,
so it made sense to spend around 12m pounds on the Southern Village shopping
centre, where Hoyt will set up its first multi-screen cinema in the UK.

Cine-UK and Bass are the anchors in Swindon
and Warner at Cribs Causeway, Bristol. Both these are in bigger, long-term developments,
so the land comes in at historic cost and no margin goes out at a stiff yield
to a developer. With another 23 shopping centres in the portfolio, it may be
some time before Taylor need to go looking for ready-made schemes.